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Inside trading verdict

Raj Rajaratnam was a Wall Street success story. The Sri Lankan native rose from being an adept picker of technology stocks at a small New York investment bank to the manager of his own hedge fund with more than $7 billion in assets.

While his clients and rivals marveled at the wide range of contacts that boosted his Galleon Group, Rajaratnam's investing edge came at least in part from confidential information he traded on illegally. A federal jury in New York City on Wednesday found him guilty of 14 counts of securities fraud and conspiracy.

While insider trading cases usually are triggered by suspicious fluctuations in a stock's value, prosecutors got the jump on Rajaratnam after a government informant taped calls with him exchanging secret information. A judge in 2008 authorized a wiretap on Rajaratnam's phone, which provided a trove of incriminating evidence.

The wiretap, usually reserved for drug and organized crime investigations, reflects the government's new hardball approach to market fraud. The U.S. attorney in Manhattan has charged 47 people with insider trading over the last 18 months and obtained 36 convictions. FBI agents also raided three large hedge funds last year, sending shivers through Wall Street.

The skullduggery at Galleon was a sideshow, distinct from the recklessness of the big Wall Street firms that nearly cratered the financial system in 2008. No criminal charges have been filed against any of those financiers -- in contrast with prosecutions in the savings and loan scandal in the 1980s.

Yet the conviction of Rajaratnam shines a spotlight on hedge funds and may point the way to further prosecutable offenses. The successful outcome helps level the playing field for routine investors, not privy to inside information, and is a welcome reminder of why the markets, despite the squeals of put-upon financiers, require firm regulation.


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